Over the next few weeks, thousands of Australian small businesses will pay for their staff to let their hair down at the annual end-of-year celebration.
Here is my comprehensive guide to the tax consequences of Christmas for your business.
First of all, I’ll consider entertainment and gifts for your employees, and then I’ll consider your customers and suppliers.
What about your employees?
1. Is FBT payable? If you throw a Christmas function for your staff off-site, for example at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer.
However, provided the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.
2. Number of benefits: The minor benefits exemption applies to each benefit provided. What that means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $290, then both expenses are free of FBT.
3. Price per head: If you spend more than $300 per head on the function, the whole lot will be subject to FBT, not just the excess.
4. Party costs: The costs (such as food and drink) of a Christmas party are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees.
If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption (above).
5. Paying for transport: If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site, but will be exempt from FBT if the party is at your premises.
6. Are Christmas parties tax deductible? The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax deductible for income tax purposes. Nor can the business claim GST credits for the costs incurred.
7. Are Christmas gifts tax deductible? Confusingly, even though gifts to employees are also covered by the FBT exemption, they generally ARE tax deductible and a GST credit can be claimed.
8. Tax for employees: None of this generally impacts on employees’ tax position. They can eat, drink and be merry knowing that the tax consequences usually fall only on the employer.
And what about your clients and suppliers?
1. Tax for parties for clients and suppliers: If you hold a bash for clients and suppliers, there is no FBT (which is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible. The provision of entertainment isn’t tax deductible.
2. Gifts for clients and suppliers: If you give festive gifts to clients and suppliers, you can generally claim a tax deduction for the cost of those gifts, where they are given with a view to generating future income in the business.
So if you give a festive gift of a decent bottle of malt whisky to your best customer, with a view to building goodwill that will lead to more sales next year, the cost of the malt is tax deductible.
3. Deductions on capital items and private gifts: Your business can’t claim a deduction for gifts of capital items, such as a piece of technology (a tablet computer, for instance). Nor can you claim a deduction if the gift is for private purposes – so if your best customer is also your brother-in-law, you might struggle to get the deduction.
4. What's a gift and what's provisions of entertainment? The dividing line between a gift (such as giving a bottle of wine) and the provision of entertainment (such as taking the client to a bar and purchasing a bottle of wine for consumption in the bar) can be hazy, particularly where the gift is, for instance, a voucher for a meal in a restaurant or a theatre show. Talk to your accountant if you’re not sure whether you’re giving a gift or providing entertainment.
As you can see, Christmas can be a surprisingly taxing time if you’re not careful. Follow the advice above and you should be able to avoid an unwelcome festive tax bill, but remember the information above is general in nature, so if you'd like specific advice, talk to your accountant.
Mark Chapman is the director of tax communications at H&R Block, and a former senior director of the ATO.